Running a temporary staffing company can be very profitable. The current business environment favors outsourcing employees rather than hiring them. This situation creates an attractive opportunity for staffing agencies.
However, running a successful staffing agency is challenging. One of their biggest challenges is making payroll on time. This problem affects small and growing staffing companies. Fortunately, there are a few ways to solve this problem. In this article, we cover:
- The payroll problem
- How does factoring work?
- Advantages for staffing agencies
- Is factoring right for your agency?
1. The payroll challenge
Paying employees on time is one of the greatest challenges for staffing company owners. This challenge stems from how commercial clients pay their invoices.
As a staffing company owner, you have to pay employees every week or two. However, client payments are different. Your clients don’t pay as soon as you submit the signed timesheets. Instead, clients demand 30 to 60 days to pay their invoices. This payment delay creates a gap in your cash flow that your company’s cash reserves must cover.
This situation can work as long as your company doesn’t grow and clients pay on time. However, running a company this way is risky. You are always one late payment away from problems. Ultimately, you will encounter issues if clients start paying slower or if you outgrow your reserve.
Follow these three steps to improve your situation and prevent cash flow problems.
a) Improve invoicing and collections
Your first step is to examine your customer invoicing and collections. Having a good invoicing and collections process is key to a successful staffing agency. Billing and collections bring the cash flow that keeps your company running. This process should be second only to customer service.
Unfortunately, many staffing agency owners don’t give this process the attention it needs. This neglect often leads to invoicing problems and slow-paying customers. Slow or unpaid invoices create cash flow problems that could have been avoided with some planning.
The solution is relatively simple. Create a billing and collections process and be disciplined about using it. The process should:
- Verify commercial credit before extending 30-day terms
- Send time cards and invoices promptly
- Verify that the right person received your invoices
- Handle late payments promptly and professionally
b) Offer early payment discounts
If your invoicing and collections are working well and you still have cash flow problems, consider offering early payment discounts to your clients. Early payment discounts are simple to implement and often solve the cash flow problem. They are a great option, at least for the short term.
As its name suggests, early payment discounts work by offering clients a discount as an incentive to pay quickly. It’s common to offer clients a 2% discount on their invoice if they pay in less than 10 days. However, other arrangements are possible.
Early payment discounts have advantages for both the client and the staffing agency. Clients enjoy savings, which drop directly to their bottom line. In exchange, the staffing company enjoys better cash flow. This arrangement can often alleviate problems.
Offering early payment discounts has one disadvantage, though. Your clients choose if they use them and when they use them. Clients don’t have to pay any invoices early. It’s their choice. More importantly, clients could stop paying early if market conditions become difficult – just when you need early payments the most.
c) Use invoice factoring
2. How does factoring work?
Factoring works by financing your invoices from slow-paying but creditworthy customers. Instead of you having to wait 30 to 60 days to get paid by your customer, the factor pays you immediately. This payment provides the funds to make payroll and cover other business expenses.
Factoring companies finance your invoices in two installments. The first installment is called the advance. It covers 90% to 95% of the invoice’s value and is deposited to your bank account shortly after you send the invoice to the factor.
The remaining 5% to 10%, less the factoring fee, is deposited to your bank account once your client pays in full. The transaction settles at this point. For more information, read “What is factoring?”
3. Advantages for staffing agencies
A factoring solution has several advantages for staffing agencies. The most important benefits include:
- Improves cash flow quickly
- Available to new and startup agencies
- Available to companies in distress
- Easy to qualify for
- Line increases with your sales
- Factors help determine the creditworthiness of your clients
- Can be deployed quickly
- Available as a short-term or long-term solution
4. Is factoring right for your staffing company?
Although a factoring line helps companies with cash flow problems, it is not the right solution for every company. Your company can benefit from factoring if your:
- Cash flow problems stem from slow-paying clients
- Clients pay in 30 to 60 days
- Clients have good commercial credit
- Invoices are not encumbered by liens/loans
- Company does not have open judgments/litigation
Need factoring for your staffing agency?
We are a leading factoring company and can provide staffing agencies with high initial factoring advances and low fees. For an instant quote, fill out this form or call us toll-free at (877) 300 3258.